British Pound and Brexit: Wild Ride Continues

After the United Kingdom's somewhat surprising decision to leave the European Union in June of this year, the Pound's value dropped significantly against almost any currency by which you want to take measure.

After trading at those diminished levels for a couple the months, the Pound sunk even lower when announcements from the region's authorities suggested its exit from the European Union could start early in 2017.

If you need further context on just how dramatic these moves have been, consider the fact that the Pound recently touched 30-year lows against the US Dollar.

Big moves in an internationally-known financial instrument almost always grab the attention of traders, and the Pound's absolute annihilation in 2016 is of course no exception.

For those interested in learning more about potential trading ideas related to the British Pound, a recent episode of Meet with Pete and Beef may be of interest. On the show, hosts Pete Mulmat and Mike Hart (aka “Beef”) discuss a variety of products that traders can use to get exposure to the British Pound.

These strategies range from simply getting long the Pound versus the US Dollar as a contrarian play (potentially leveraging the multi-decade lows in the relative value of these two currencies) to selling premium in British-based companies that could benefit from a weaker Pound.

While the first strategy of getting long the Pound versus the Dollar is fairly straight forward, the second strategy deserves slightly more context.

As Pete highlights on the show, Pound weakness could translate to stronger sales for companies doing business primarily in Britain because their products are now relatively cheaper (from a foreign exchange rate perspective). Therefore, export-focused companies in Britain may actually experience an uptick in sales volume in the near-to-middle term (and potentially even longer).

To leverage such a thesis, Pete and Beef outline some short premium strategies deployed in the American Depository Receipts (ADRs) of several large cap British multinationals traded on exchanges in the United States.

If you've been looking for ways to get exposure to the British Pound, or another foreign currency, the above episode of Meet with Pete and Beef is a great place to start.

Another great episode focused on foreign currencies opportunities is an episode of Market Measures titled "Currencies: Actual Moves versus Expected Moves." The focus of this segment is a study involving some heavily traded foreign currency ETFs and associated volatility indexes (that track the volatility of a particular currency).

Interestingly, the results of the study suggest that the implied volatility of currencies tends to be overstated much like the implied volatility of market indexes. More information on this study can be accessed by clicking this link.

We hope you'll take the time to watch the full installments of both episodes when your schedule allows.

It should be noted that further volatility in the British Pound could be on the horizon. Recent developments have suggested that lawmakers in the United Kingdom may have to confirm the referendum before the region can officially exit the European Union. A scenario that could add even more uncertainty to already troubled waters.

If you have any questions related to foreign currency positions/exposure we hope you’ll reach out at support@tastytrade.com.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

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